2015 Annual Report - The Philadelphia Contributionship

Transcription

T he Philadelphia
C ontributionship
263rd Annual Report
2015
EMBRACING CHANGE
The Philadelphia Contributionship
Mutual Holding Company
TPC Holdings, Inc.
Vector Security Holdings, Inc.
Houses from Loss By Fire, Inc.
for the
Insurance
of
The Philadelphia Contributionship Insurance Company
Germantown Insurance Company
First Insurance Company
of
America
Franklin Agency, Inc.
At A Glance
The Philadelphia Contributionship Mutual Holding Company is a mutual holding
company serving as the ultimate controlling parent in the corporate structure. The
principal business of The Philadelphia Contributionship Mutual Holding Company is to
hold the stock of TPC Holdings, Inc.
TPC Holdings, Inc. is a stock holding company whose principal business is to hold the
stock of The Philadelphia Contributionship for the Insurance of Houses from Loss by
Fire, Inc. and Vector Security Holdings, Inc.
The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire,
Inc. is the oldest successful property and casualty insurance company in the United
States, having been founded in 1752. The company was converted from a mutual
company to a stock company in 2009.
The Philadelphia Contributionship is our group of insurance companies writing
residential business in predominantly urban communities. Our Company was founded by
Benjamin Franklin and his fellow fire-fighters to provide insurance to urban Philadelphia
homeowners. We provide homeowners, fire and liability insurance to customers in New
Jersey, Pennsylvania, Delaware and Maryland. We have earned the distinction of A
rating or higher from A.M. Best Company for over 90 years.
Vector Security Holdings, Inc., our residential and commercial security subsidiary, is the
eighth largest security company in the United States. Vector provides electronic security
services to commercial and residential markets including fire and burglary detection,
video, access control, environmental monitoring, home automation and commercial
analytics. Subsidiary Vector Intelligent Solutions provides customized managed network
services including broadband and broadband-enabled services, network deployment,
network management and mobile applications. Vector has received numerous awards for
its outstanding quality of service and was selected as the 2015 Alarm Dealer of the Year
by industry publication SDM.
Our Mission
is committed to providing insurance
protection for the urban community and
surrounding areas. We are dedicated to producing an
underwriting profit by providing responsive
insurance services to our members and
policyholders as well as maintaining a stable
market for our agency partners. We value
our employees and are committed to
providing them professional development
opportunities. We will continue to
support the community that we’ve
been a part of since 1752.
1
Letter to Policy Holders
2
Change. It has been said that the one thing that is constant is change.
That is certainly true in our business. Changes in weather
patterns, economic conditions, technology, analytics,
regulation, and the buying practices of consumers
are factors that impact us in new ways. For a number
of years now, The Philadelphia Contributionship
has been preparing for change, and participating in
the kind of change that will position us to thrive in the
environment that we expect to exist in the future. We have
significantly changed the geographic profile of our business to address
our exposure to changes in weather. We have improved our capabilities
in the field of analytics to make better use of data to select and price
business. And we have invested in new technology to improve the ease
of doing business with our agency partners and stabilize our technology
platform for the foreseeable future. That platform, “The Key”, is now
operational in three of our four states and is functioning well with excellent reviews from our agents. Vector Security has prepared for the sunset
of the 2G network, has expanded its geographic reach and has grown its
network services division.
All of these are examples of the work The Philadelphia
Contributionship is doing to embrace change. With change comes
opportunity and this work is intended to position us to capitalize on
opportunities as they present themselves. Our people have done an
outstanding job managing through this change. In fact, none of the
progress we have made so far would be possible without the hard work
and dedication of our staff.
We are happy to report that The Philadelphia Contributionship
remains in an outstanding financial position. In April 2016 we will
complete our 264th year in business – an enviable track record. With the
balance sheet strength that we enjoy, you can trust that we are well-positioned to meet your insurance and security needs for a long time to come.
Insurance Group Operations
We were not immune to the changing weather that occurred in
2015. Severe weather and deep freezing temperatures that occurred in
the first half of the year, produced nine catastrophic events that generated nearly 1,700 claims worth over $14 million. That proved to be too
much to overcome and as a result, we had an underwriting loss for the
year of $5.6 million.
Direct written premium was $136.1 million in 2015, down 1.7%
from 2014 while policy counts were essentially flat for the year. That is a
result of a shift in our policy counts from territories with higher exposure
to territories with lower exposure. Net written premium in 2015 was
$122.2 million, down 1.3% from 2014. Net premiums earned for 2015
were $123.2 million, up 1.1%.
Gross income from the investment portfolio was $9.8 million in
2015 compared to $10.8 million in 2014. Net realized gains on investments were $3.7 million during 2015 compared to $27.3 million in 2014.
In total, revenues from insurance operations for the year ending
December 31, 2015 were $136.7 million compared to $160.0 million
for 2014.
Losses and loss adjustment expenses were down 7.5% from the prior
year due primarily to lower losses from weather catastrophes. In total,
2015 losses and loss adjustment expenses were $93.5 million compared
to $101.1 million in 2014.
Underwriting expenses were up 3.6% in 2015 to $35.3 million and
investment expenses decreased 5.6% to $2.4 million consistent with the
performance of our investment portfolio.
Finally, we continued our consistent record of returning capital to
our members with dividend payments totaling $1.0 million.
Overall, the insurance operation produced income before income
taxes of $4.9 million in 2015 compared to $21.8 million in 2014.
3
4
The Philadelphia Contributionship’s financial strength rating from
AM Best Company was adjusted in 2015 to A (Excellent), again recognizing the strength and stability that has been the hallmark of our
company. This represents the 93rd consecutive year that we have been
rated A (Excellent) or better.
Security Group Operations
Vector Security, Inc. was selected as the 2015 SDM Dealer of the
Year. SDM, Security Distributing and Marketing, is the security channel media providing management and technical professionals with
solutions for the security marketplace. Founded in 1980, the Dealer of
the Year honor is given to the alarm company that has distinguished
itself, among its peers, for financial performance, employee retention
and development, customer service, industry contributions and marketing efforts. Vector is one of only two multi-year winners, previously
awarded in 2003.
Performance in 2015 included a 4.2% increase in revenue achieving
a significant milestone by exceeding $300 million. Our recurring revenue organic growth strategy continued to be a focus, with an additional
$1.1 million of recurring, a 21.4% increase over 2014. Year-over-year
earnings were impacted by a major 2015 initiative to upgrade customers with 2G radios. The 2G network is due to sunset at the end of 2016.
Our branches successfully completed this work at a cost of $3.7 million.
Additional units still need to be replaced in our Dealer Division and we
have budgeted $2 million dollars in 2016 to complete this project.
In September, we acquired the assets of Pelican Security Network.
Through this acquisition we entered several new markets which included
Baton Rouge, Shreveport, and Covington in Louisiana and Dallas, Texas.
We have successfully completed the conversion of all systems and processes, as well as the rebranding of all customers in these markets.
Our managed network services division continues to grow with a
year-over-year revenue increase of 21%. This has been driven by the
need for retailers to increase their connectivity to accommodate customer demand and the ever increasing requirements for bandwidth. We
continue to integrate this division into our National Accounts Division
to provide a unified solution for our retail customers seeking to move to
IP security products. Combined, the two divisions added 24 new retail
brands to their portfolio in 2015.
Vector continues to enhance product and service offerings to the
residential market to remain competitive in the connected home space.
Commercially, we are aligned with innovative partners at competitive
price points. We see opportunity in both markets as standards for home
automation and analytics progress, creating a foundation for better integration of products across manufacturers.
Consolidated Balance Sheet
Total assets as of December 31, 2015 are $764.4 million, a 2.9%
decline from 2014. The decline was primarily due to a decrease in the
market value of the investment portfolio. Liabilities declined 0.4%
to $420.5 million. As a result, total equity as of December 31, 2015 is
$321.7 million – down 6.1% from the end of 2014.
On behalf of the Board of Directors, our officers and employees, we
thank our loyal customers for placing their confidence in The Philadelphia
Contributionship to meet your insurance and security needs.
Scott M. Jenkins
Chairman of the Board
Robert G. Whitlock, Jr., FCAS, MAAA
President and Chief Executive Officer
5
6
Consolidated
Financial Statements
table of contents
consolidated balance sheet
December 31, 2015 and 2014....................................................................... 8
consolidated statement of operations
Years ended December 31, 2015 and 2014....................................................10
consolidated statement of
comprehensive income (loss)
Years ended December 31, 2015 and 2014.................................................... 11
consolidated statement of equity
consolidated statement of cash flows
notes to consolidated financial statements............... 15
independent auditors’ report......................................... 44
a
7
CON SOL I DAT E D BA LA NCE SHEET
DE C EM BE R 3 1 , 201 5 A ND 2014
(In Thousands, Unless Otherwise Noted)
8
assets
2015
2014
$141,218
10,457
2,197
1,835
216,194
28,604
$146,915
10,785
2,194
1,665
236,359
25,269
400,505
423,187
14,672
14,253
1,913
8,448
1,030
1,523
256
13,686
6,499
604
13,204
18,428
1,957
9,101
763
1,591
463,389
489,950
2,360
701
23,137
13,028
5,746
6,361
1,029
1,998
25,704
10,624
4,657
5,817
1,093
880
53,659
49,476
25,837
159,321
35,080
22,188
1,076
3,895
23,216
166,425
39,722
17,226
1,600
301,056
297,665
$ 764,445
$ 787,615
insurance group assets
Investments:
Fixed income securities
Convertible bonds
Preferred stocks
Convertible preferred stocks
Common stocks
Other invested assets
Cash and cash equivalents
Reinsurance recoverable and receivable
Prepaid reinsurance premiums
Premiums receivable
Other receivables
Accrued income from investments
Income tax recoverable
Deferred acquisition costs
Property and equipment, net
Other assets
Total Insurance Group assets
—
13,728
7,259
732
security group assets
Current assets:
Trade accounts receivable, less allowance
for doubtful accounts of $1,811 in 2015 and
$1,420 in 2014
Unbilled revenue
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Income taxes receivable
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other noncurrent assets
Deferred charges
Total Security Group assets
Total assets
see not es to consolidat ed fina nci a l s tat ements .
—
CON S OL IDAT E D B AL ANCE SHEET
DE C E M BER 3 1 , 2 0 1 5 AND 2014
liabilities and equity
2015
2014
Unpaid losses and loss adjustment expenses
Unearned premiums
Advance premiums
Deposit premiums
Income taxes payable
Ceded premium payable
Other liabilities
$ 94,361
71,500
2,306
15,966
19,316
—
208
8,417
$ 93,536
72,586
2,871
16,352
30,472
78
296
8,155
Total Insurance Group liabilities
212,074
224,346
5,367
24,234
887
10,016
4,336
184
3,332
23,816
1,134
10,070
3,983
—
45,024
42,335
157,917
—
—
2,206
3,263
150,892
1,173
450
Total Security Group liabilities
208,410
197,758
Total liabilities
420,484
422,104
22,244
22,919
279,791
41,926
282,643
59,949
321,717
342,592
$764,445
$787,615
insurance group liabilities
security group liabilities
Current liabilities:
Current maturities of long-term debt
Accounts payable and accrued expenses
Customer deposits
Unearned revenue
Purchase holdbacks
Interest rate swap payable
Total current liabilities
Long-term debt, less current maturities
Long-term purchase holdbacks
Unearned revenue
Other long-term liabilities
redeemable noncontrolling interest (note 8)
—
2,908
equity
Unassigned equity
Accumulated other comprehensive income
Total equity
Total liabilities and equity
9
CON SOL I DAT E D STATEM ENT OF OPER ATIONS
Y EAR S E N DED DECEM BER 31 , 201 5 A ND 2014
10
2015
2014
$123,218
9,836
3,666
$121,858
10,757
27,340
136,720
159,955
93,535
35,313
2,357
101,085
34,078
2,496
131,205
137,659
5,515
22,296
insurance group
Revenue:
Net premiums earned
Gross investment income
Net realized gains on investments
Total revenue
Losses and expenses:
Losses and loss adjustment expenses
Underwriting expenses
Investment expenses
Total losses and expenses
Income before other income, dividends to
policyholders, and income tax expense
Other income, net
Dividends to policyholders
Insurance Group income before income tax
expense
400
(991)
468
(993)
4,924
21,771
300,184
192,765
288,175
173,569
107,419
114,606
63,729
310
8,872
64,080
39
8,528
security group
Revenue
Cost of sales
Gross profit
Operating expenses:
Selling, general, and administrative
Acquisition-related costs
Depreciation
Amortization and impairment of intangible
assets and goodwill
Total operating expenses
Operating (loss) income
Other:
Interest expense
Other income, net
Gain on business divestiture
40,419
35,459
113,330
108,106
(5,911)
6,500
(4,953)
542
—
(5,161)
161
2,888
(4,411)
(2,112)
Security Group (loss) income before
income tax expense
(10,322)
4,388
(Loss) income before income tax (benefit) expense
(5,398)
26,159
Income Tax (Benefit) Expense
(2,311)
8,555
(3,087)
17,604
Net (loss) income
Less: Net loss attributable to redeemable
noncontrolling interest
Net (loss) income attributable to the Company
(235)
$ (2,852)
(911)
$ 18,515
CON S OL IDAT E D STAT EM ENT OF COM PR EHENSI V E I NCOME (LO S S )
Y E A RS EN DE D DEC E M BER 31 , 201 5 A ND 2014
2015
Net income (loss)
Other comprehensive income net of tax:
Unrealized gains (losses) on securities
available-for-sale:
Unrealized net holding gains arising
during the year (net of tax of $(7,767) in
2015 and $9,563 in 2014)
Less: reclassification adjustment for net
realized gains included in net income
(net of tax of $1,954 in 2015 and $9,675
in 2014)
2014
$ (3,087)
$ 17,604
(14,424)
17,760
3,629
17,968
(18,053)
(208)
(212)
(266)
(385)
(403)
173
137
308
(415)
(36)
(897)
237
117
(143)
(543)
Other comprehensive loss
(18,023)
(614)
Comprehensive (loss) income
(21,110)
Cash flow hedge:
Change in fair value of cash flow hedge (net of
tax of $(114) in 2015 and $(143) in 2014)
Less: reclassification adjustment for settlement
of cash flow hedge included in net income
(net of tax of $(207) in 2015 and $(217) in
2014)
Defined benefit pension plan:
Change in actuarial assumptions
Asset gain and amortization of net loss
Experience gain (loss)
Defined benefit pension plan, net actuarial
(loss) arising during the year (net of tax of
$(78) in 2015 and $(292) in 2014)
Less: Comprehensive loss attributable to
redeemable noncontrolling interest
Comprehensive (loss) income attributable to
the Company
(235)
$(20,875)
16,990
(911)
$ 17,901
11
CON SOL I DAT E D STATEM ENT OF EQUI T Y
12
balance, january 1, 2014
Net income attributable to the
Company (1)
Loss attributable to redeemable
noncontrolling interest
Other comprehensive income,
net of tax
balance, december 31, 2014
Net (loss) attributable to
the Company (1)
Other comprehensive loss,
net of tax
balance, december 31, 2015
Unassigned
Equity
Accumulated
Other
Comprehensive
Income
Total
$261,843
$60,563
$ 322,406
18,515
—
18,515
2,285
—
2,285
—
282,643
(2,852)
—
$279,791
(614)
59,949
—
(18,023)
$41,926
(614)
342,592
(2,852)
(18,023)
$321,717
(1) Net (loss) income at December 31, 2015 and 2014 excludes $(235) and $(911), respectively,
allocable to the redeemable noncontrolling interest, which, is reported in the mezzanine
section of the consolidated balance sheets at December 31, 2015 and 2014. See note 8 to the
consolidated financial statements for further detail.
CON S OL IDAT E D STAT EM ENT OF CA SH FLOWS
Y E A RS EN DE D DEC E M BER 31 , 201 5 A ND 2014
2015
2014
cash flow from operating activities
Net (loss) income
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gains on investments
Depreciation and amortization
Gains on disposals of property and equipment
Gains on divestiture of business
Change in assets and liabilities, net of effects
of acquisitions:
Reinsurance recoverable and receivable
Prepaid reinsurance premiums
Premiums receivable
Accrued income from investments
Unpaid losses and loss adjustment
expenses
Unearned premiums
Advance premiums
Deposit premiums
Other liabilities
Income taxes and other receivables
Prepaid expenses and other assets
Trade accounts receivable, unbilled
revenue, and inventories
Accounts payable, accrued expenses and
purchase holdbacks
Unearned revenue and customer deposits
Deferred charges
Net cash provided by operating activities
$ (3,087)
$ 17,604
(3,666)
52,158
(6,348)
(69)
—
(27,340)
46,568
(2,816)
(149)
(2,888)
4,175
44
653
68
42
10,822
61
96
4
(592)
825
(1,086)
(565)
(386)
(839)
(761)
(218)
(7,830)
1,823
(189)
55
(1,210)
(517)
(3,134)
(397)
(2,240)
(89)
1,070
(3,895)
$37,629
2,032
338
—
$30,498
13
CON SOL I DAT E D STATEM ENT OF CA SH FLOWS (CONT INUE D)
14
2015
2014
cash flow from investing activities
Cash paid for acquisitions, net of cash received
Purchases of property, plant and equipment
Proceeds from disposals of property and equipment
Proceeds from divestiture of business, net
Purchases of fixed income securities
Purchases of convertible bonds
Purchases of common stocks
Purchases of convertible preferred stocks
Purchases of other invested assets
Proceeds from sales of fixed income securities
Proceeds from sales of convertible bonds
Proceeds from maturities/calls of fixed income securities
Proceeds from the sales of common stocks
Proceeds from the sales of convertible preferred stocks
Proceeds from capital distributions of other invested assets
$ (27,212)
(10,290)
85
—
(24,860)
(6,735)
(45,445)
(1,285)
(10,000)
16,468
6,379
11,950
50,041
936
—
$ (23,611)
(10,000)
174
3,867
(17,177)
(5,182)
(50,630)
(201)
(20,599)
10,910
5,558
10,429
79,023
121
406
(39,968)
(16,912)
72,374
(63,273)
—
(1,856)
(1,779)
53,992
(62,663)
405
(1,690)
Net cash provided (used in) financing activities
5,466
(9,956)
Net increase in cash and cash equivalents
3,127
3,630
13,905
10,275
$ 17,032
$ 13,905
Interest paid
$ 5,316
$ 4,414
Income taxes paid
$ 5,253
$ 10,510
In conjunction with acquisitions, the Security Group:
Recorded purchase holdbacks
$ 2,867
$ 1,595
Capital leases
$ 1,815
$ 1,867
Net cash used in investing activities
cash flow from financing activities
Proceeds from revolving credit agreements
Payments on revolving credit agreements
Contributions from noncontrolling interest, net
Principal payments on capital leases
Payments of contingent consideration
cash and cash equivalents, beginning
cash and cash equivalents, ending
—
supplementary cash flow information
supplementary schedule of noncash investing and
financing activities
NOTE S TO CON SOL I DAT ED FI NA NCI A L STATEM ENTS
DE C E M BER 3 1 , 2 0 1 5 AND 2014
(Dollars In Thousands, Unless Otherwise Noted)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The Philadelphia
Contributionship Mutual Holding Company (the Company), a mutual holding company, and its
wholly-owned subsidiaries: TPC Holdings, Inc., The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, Inc. (The Contributionship), and Vector Security Holdings,
Inc. (Vector).
The consolidated financial statements include the accounts of The Contributionship, a stock
company, and its wholly-owned subsidiaries, The Philadelphia Contributionship Insurance
Company, Germantown Insurance Company, First Insurance Company of America, and Franklin Agency, Inc. (collectively, the Insurance Group), and Vector. Vector is the parent company of
the following wholly-owned subsidiaries: Vector Security, Inc., The Jupiter Group, Inc. (Patrol),
Vector International Holdings, Inc., Vector Security Canada, Inc., and Vector Security de Mexico, S.A. de C.V., as well as majority owned subsidiary Vector Intelligent Solutions, LLC (VIS),
of which Vector owns 72% of the outstanding membership units (collectively, the Security
Group). The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), which differ in some
regard from those followed in reports to insurance regulatory authorities. All significant intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as more
information becomes known which could impact the amounts reported and disclosed herein.
The Insurance Group writes property and casualty insurance for homeowners and multi-family
dwellings principally in urban communities in Pennsylvania, New Jersey, Delaware and Maryland The Insurance Group had approximately 122,000 policyholders at December 31, 2015.
Vector sells, installs, services, and manages security systems and provides security monitoring
services as well as network services through advanced electronic systems designed to detect
intrusion, as well as fire, water, temperature, and medical emergencies. Vector has approximately 286,000 residential and commercial customers as of December 31, 2015 located primarily in Pennsylvania, Ohio, New Jersey, Louisiana, Maryland, Virginia, New York, West Virginia,
Delaware, Massachusetts, North Carolina, South Carolina, Texas, Florida, California, and Washington, DC to which it provides security monitoring services and other services. Vector also has
several large national commercial accounts to which it provides equipment and installation and
monitoring, and managed network services. No such customer accounted for more than 10% of
the December 31, 2015 and 2014 trade accounts receivable balance, respectively.
Premiums
The Contributionship issues perpetual fire and homeowners insurance policies. When a perpetual policy is issued, a deposit premium is received, which is reflected as a liability. The
deposit premium is returned if coverage terminates.
The Insurance Group also issues term policies for property and casualty coverage. Premiums
on such policies are reflected in income over the effective period of the policies. Unearned
premiums are calculated on the monthly pro rata basis.
Reinsurance
Prospective reinsurance premiums, losses, and loss adjustment expenses are accounted for
on bases consistent with those used in accounting for the original policies issued and the
terms of the reinsurance contracts.
The Contributionship cedes reinsurance to other insurance companies to minimize the net
loss potential arising from large losses and as well as from an aggregation of losses. An
allowance is established for amounts deemed uncollectible and losses are charged against
15
NOT E S TO CON SOLI DATED FI NA NCI A L STATEME NT S
DE C EM BE R 3 1 , 201 5 A ND 2014
16
the allowance when the uncollectibility of amounts recoverable from reinsurers is confirmed.
There was no such allowance recorded as of December 31, 2015, or 2014, respectively.
Acquisition Costs
Acquisition costs, such as commissions, premium taxes, and certain other underwriting and
agency expenses that vary with and are directly related to the successful acquisition of new
and renewal business, are deferred and amortized over the effective period of the related
insurance policies. The Insurance Group determines whether acquisition costs are recoverable considering future losses and loss adjustment expenses, policy maintenance costs and
anticipated investment income. To the extent that acquisition costs are determined not to be
recoverable, the difference is charged to income in the period identified. All deferred acquisition costs at December 31, 2015 and 2014 were determined to be recoverable.
Liability for Unpaid Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses includes management’s best
estimate for the ultimate net cost of all reported and unreported losses and loss adjustment
expenses incurred through December 31.
The Insurance Group believes that the liability for losses and loss adjustment expenses is
adequate to provide for the ultimate cost of losses and loss adjustment expenses, but this
liability is necessarily based on estimates, and the amount ultimately paid may vary significantly from such estimates. Those estimates are subject to the effects of trends in loss severity and frequency. This liability is continually reviewed and changes in estimates are reflected
in earnings currently.
Fixed Income Securities and Preferred & Common stocks
All fixed income securities, preferred and common stocks are classified as available-for-sale
and are carried at fair value. Management reviews the securities in its investment portfolio on
a periodic basis to specifically identify individual securities that have incurred an other-thantemporary decline in fair value below cost or amortized cost. As part of its periodic review
process, management utilizes information received from its outside professional asset manager
to assess each issuer’s current credit situation. When management’s review identifies an otherthan-temporary impairment in the valuation of a fixed income security, it compares its projected
discounted cash flows to the amortized cost in order to determine the credit related portion and
the non-credit related portion of the loss. The credit related portion is recorded as a charge in the
consolidated statement of operations while the non-credit related portion is recorded through
other comprehensive income (loss) and included as a component of accumulated other comprehensive income in the consolidated balance sheet. For preferred and common stocks, the cost
of the security is adjusted and recognized as a realized loss in the statement of operations.
For structured securities, management projects cash flows using loss adjusted cash flows
that contemplate current market factors such as prepayment assumptions, expected default
assumptions, and the current condition of the guarantor of the security. For structured securities, the discount rate used in the present value calculation is the security’s current effective
interest rate. The discount rate used for other fixed income securities is the security’s effective interest rate at the date of acquisition.
In addition to issuer-specific financial information, general economic data and management’s
projections of discounted cash flows, management also assesses whether it has the intent
to sell a particular security or whether it is more-likely-than-not it will be required to sell the
security before its anticipated recovery. When management determines that it either intends
to sell or is no longer more likely than not to hold the security until its anticipated recovery, a
realized loss is recorded in the consolidated statement of operations for the full amount of the
difference between fair value and amortized cost.
Dividends and interest income are recognized when earned. Premiums and discounts on fixed
income securities are amortized or accreted based upon the effective-interest method. Realized gains and losses on investments are determined by the specific identification method.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
Other Invested Assets
Other invested assets consist of investments in limited partnerships that invest in oil and gas
interests and equity and debt securities of public and privately held companies. These investments are classified as available-for-sale investments and are carried at fair value. Net unrealized gains (losses) are reported as a component of accumulated other comprehensive income.
See Note 3 for more information on the determination of fair value.
The Company reviews other invested assets in its investment portfolio on a periodic basis to
specifically identify individual securities that have incurred an other-than-temporary decline in
fair value below cost. This review encompasses, among other things, recent issuer activities,
such as defaults, quarterly earnings announcements, and other pertinent financial news for
the issuer, recent developments and economic outlooks for particular industries, rating agency
actions, and the length of time and extent to which fair value has been less than cost. When
management’s review identifies an other-than-temporary impairment in the valuation of a
security, a realized loss is recognized in the consolidated statement of operations.
Convertible Bonds and Preferred Stocks
The Company’s investments in convertible bonds and convertible preferred stocks are considered hybrid financial instruments and are carried at estimated fair value, with changes in estimated fair value reported in net realized gains on investments in the consolidated statements
of operations and comprehensive income.
Property and Equipment - Insurance Group
Property and equipment, which primarily consist of the Insurance Group’s home office,
electronic data processing equipment, furniture and fixtures, a software license and related
implementation costs, are stated at cost, less accumulated depreciation of $10,091 and
$8,554 at December 31, 2015 and 2014, respectively. Depreciation is provided using the
straight-line method over the estimated useful lives of depreciable assets. Land is not subject
to depreciation.
Property and Equipment - Security Group
Property and equipment are stated at cost less accumulated depreciation. Equipment under
capital leases is stated at the present value of minimum lease payments. Vector provides for
depreciation over the estimated useful lives of the related assets utilizing the straight-line
method. Estimated useful lives range from 3 to 12 years, with the exception of buildings,
which are depreciated over approximately 25 years.
Vector installs certain home security package systems in residences if the customer commits
to a monitoring arrangement for a minimum period of time. These security systems remain
the property of Vector. The costs of the security systems, including costs of installation, are
capitalized and depreciated over their estimated useful life of 7 years.
Balances consist of the following as of December 31:
2014
2015
Land
Buildings and improvements
Home security package systems
Furniture and fixtures
Vehicles and equipment
Construction-in-progress
$
200
4,225
36,869
4,538
19,757
242
Less accumulated depreciation
65,831
(39,994)
Total Property and Equipment
$25,837
$
200
4,098
32,936
4,437
19,231
144
61,046
(37,830)
$23,216
17
DE C EM BE R 3 1 , 201 5 A ND 2014
18
Revenue Recognition
Vector’s major sources of revenue are equipment sales, installation, monitoring and managed network services as described above. While Vector frequently sells these elements in a
bundled arrangement, it also sells each element individually, with no discounts given for the
elements included in a bundled arrangement. Accordingly, when elements are included in a
bundled arrangement, each element is treated as a separate unit of accounting. The revenue
recognition policy with respect to each of the three major elements is as follows:
• Installation and equipment revenue - Recognized as services are performed on a percentage-of-completion basis calculated on a cost-to-cost comparison.
• Service revenue - Recognized as services are performed for time and material agreements and recognized ratably over the service period for those agreements entered
into under a fixed fee arrangement.
• Monitoring and managed network revenue - Recognized ratably over the service period
with amounts billed in advance of service delivery deferred and amortized over the
applicable period of service.
Vector’s overall arrangement fee for bundled arrangements is allocated to each element
(both delivered and undelivered items) based on their relative selling prices, regardless of
whether those selling prices are evidenced by vendor-specific objective evidence or third-party
evidence or are based on the entity’s estimated selling price. Application of the “residual
method” of allocating an overall arrangement fee between delivered and undelivered elements is not permitted.
In connection with our Home Security System (HSS) package offering Vector bundles a free or
low-cost equipment package with a long-term monitoring contract, which is generally three to
five years. Vector retains ownership of the system for the duration of the monitoring contract.
The equipment costs, including related direct costs, are capitalized and amortized to cost of
sales over the expected life of the customer relationship, which is generally seven years. Such
direct costs are recorded as deferred charges on the consolidated balance sheet. Upfront fees
charged in connection with the HSS packages are recorded as unearned revenue on the consolidated balance sheet. The HSS packages are priced so that the additional monitoring and
other fees generated over the life of the contract will exceed the cost of the equipment and
related direct costs.
Inventories
Inventories, consisting primarily of security equipment, are stated at the lower of average cost
or market.
Intangible Assets
Goodwill represents the excess purchase price over the fair value of the net identifiable assets
acquired. Goodwill was tested for impairment as of December 31, 2015 and 2014, and no
impairment was identified.
Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of a long-lived asset may not be recoverable. If circumstances
require a long-lived asset or asset group be tested for possible impairment, Vector first compares the undiscounted future cash flows of that asset or asset group to its carrying value. If
the carrying value of the long-lived asset or asset group is greater than the undiscounted cash
flows, an impairment is recognized to the extent that the carrying value exceeds its estimated
fair value. Vector recorded impairment expense, through amortization, on their customer service
agreements of $6,891 and $2,499 during 2015 and 2014, respectively.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
Customer service agreements, which have been acquired through Vector’s authorized dealer
program or as a result of an acquisition, are amortized on a straight-line basis over periods
ranging from 10 to 13 years.
Customer relationships, which were recorded in connection with acquisitions, are amortized
on a straight-line basis over a period of 13 years.
Covenants not-to-compete are generally amortized on a straight-line basis over periods ranging from 3 to 5 years, depending upon the length of the agreement. All intangible assets have
been recorded in connection with acquisitions.
Covenants not to solicit, which were recorded in connection with acquisitions, are amortized
on a straight-line basis over a period of 8 years.
Trade names, which were recorded in connection with acquisitions, are amortized on a
straight-line basis over a period of 5 years.
Technology, which was recorded in connection with acquisitions, is amortized on a straightline basis over a period of 5 years.
All fully amortized intangible assets are removed from Vector’s asset system in the year following full amortization.
Redeemable Noncontrolling Interest
On August 15, 2013, Vector issued membership interest units to Industry Retail Group,
LLC (IRG), the noncontrolling interest holder of VIS, that is redeemable either at the option
of the holder or upon the occurrence of an event that is not solely within Vector’s control.
Under the terms of an agreement related to the IRG acquisition, the noncontrolling interest
holder has the right to require Vector to purchase its 28% interest in Vector’s subsidiary for
an amount equal to a specified multiple of trailing twelve-month gross margin multiplied by
the noncontrolling interest holder’s percentage interest in Vector’s subsidiary at the time of
redemption. The noncontrolling interest becomes redeemable within 10 days after the earliest
of the third anniversary of the date of the acquisition and every anniversary thereafter or the
date on which certain principals of IRG no longer control IRG. The conditions for redemption
of the noncontrolling interest had not been met as of December 31, 2015. The conditions for
redemption of the noncontrolling interest are expected to be met in 2016.
Income Taxes
Deferred income taxes are recognized in the consolidated financial statements for the future
tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective income tax bases. Deferred
income tax expense is the result of changes in deferred tax assets and liabilities. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion of the deferred income tax asset will not be realized.
A tax position is recognized as a benefit at the largest amount that is more likely than not to be
sustained in a tax examination solely on its merits. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained. The Company recognizes interest
and penalties accrued related to uncertain tax positions as a component of income tax expense.
The Company has no such uncertain tax positions as of December 31, 2015 or 2014.
Cash Equivalents
Cash equivalents consist of highly liquid short-term investments with an expected maturity at
date of purchase of three months or less.
19
DE C EM BE R 3 1 , 201 5 A ND 2014
20
Credit Risk
The Company maintains cash balances in major financial institutions in excess of the federally
insured limit of $250 by the Federal Deposit Insurance Corporation (FDIC). The Company has
not experienced any losses and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Derivative Instruments and Hedging Activities
Vector accounts for derivatives and hedging activities as either assets or liabilities in the balance sheet at their respective fair values.
Vector only enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized
asset or liability (cash flow hedge). For all hedging relationships, Vector formally documents
the hedging relationship and its risk-management objective and strategy for undertaking
the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged,
how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed
prospectively and retrospectively, and a description of the method of measuring ineffectiveness. Vector also formally assesses, both at the hedge’s inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly effective in offsetting
cash flows of hedged items. For derivative instruments that are designated and qualify as a
cash-flow hedge, the effective portion of the gain or loss on the derivative is reported as a
component of other comprehensive income and reclassified into earnings in the same period
or periods during which the hedged transaction affects earnings. Gains and losses on the
derivative representing either hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness are recognized in current earnings.
Vector discontinues hedge accounting prospectively when it determines that the derivative
is no longer effective in offsetting cash flows of the hedged item, the derivative expires or is
sold, terminated, or exercised, the derivative is designated as a hedging instrument because
it is unlikely that a forecasted transaction will occur, or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
In all situations in which hedge accounting is discontinued and the derivative is retained, Vector continues to carry the derivative at its fair value on the balance sheet and recognizes any
subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, Vector discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income.
Deferred Financing Costs
Deferred financing costs represent loan fees and other related costs incurred in obtaining the
debt financing currently in place, which are being amortized over the term of the related debts.
Comprehensive Income
Certain changes in assets and liabilities, such as unrealized gains and losses on available-forsale investments, changes in fair value of certain hedges, defined benefit pension plans, and
unrealized losses related to factors other than credit on fixed income securities are reported
as a separate component on the equity section of the consolidated balance sheet. Such
items, along with net income, are components of comprehensive income and reflected in the
consolidated statement of comprehensive (loss) income.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
Changes in the balances of each component of accumulated other comprehensive income,
net of tax, at December 31 are as follows:
UNREALIZED GAINS ON
AVAILABLE-FOR-SALE
SECURITIES
CASH FLOW HEDGE
$62,316
$(427)
$(1,326)
$60,563
17,760
540
(574)
17,726
Amounts reclassified
from accumulated
other comprehensive
income
(17,968)
(403)
31
(18,340)
Balance, December 31, 2014
62,108
(290)
(14,424)
558
(196)
(14,062)
(3,629)
(385)
53
(3,961)
Balance, January 1, 2014
Other comprehensive
income before
reclassifications
Other comprehensive
income before
reclassifications
Amounts reclassified
from accumulated
other comprehensive
income
Balance, December 31, 2015
$44,055
$(117)
DEFINED BENEFIT
PENSION PLAN
(1,869)
$(2,012)
ACCUMULATED OTHER
COMPREHENSIVE
INCOME
59,949
$41,926
The following table presents the effect of the reclassification of significant items out of accumulated other comprehensive income on the respective line items in the consolidated statement of operations for year ended December 31, 2015.
2015
2014
AFFECTED LINE ITEM
IN THE CONSOLIDATED STATEMENT
OF OPERATIONS
$5,583
$ 27,643
NET REALIZED GAINS
ON INVESTMENTS
Interest rate derivative contracts
Change in retirement plan liabilities
adjustment
592
620
INTEREST EXPENSE
Amortization of actuarial losses
Total reclassifications before income
tax expense
(81)
(48)
AMOUNT RECLASSIFIED FROM ACCUMULATED
OTHER COMPREHENSIVE INCOME
Unrealized gain on securities
available for sale
Realized gains on sale of securities
Gains on cash flow hedges
Less: Income tax expense
Total reclassifications net of
income tax expense
6,094
2,133
28,215
9,875
$3,961
$18,340
(a)
(a) These accumulated other comprehensive income components are included in the
computation of net periodic pension cost. See Note 12 to the consolidated financial
statements for further detail.
21
DE C EM BE R 3 1 , 201 5 A ND 2014
22
Legal Matters
The Company is involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company’s consolidated financial position, results of
operations, or liquidity.
Recently Issued Accounting Pronouncements
In May of 2015 the Financial Accounting Standards Board “FASB” issued ASU 2015-09
Financial Services Insurance (Topic 944): Disclosures about Short-Duration Contracts, which
requires additional disclosures in annual and interim reporting periods by insurance entities regarding liabilities for unpaid claims and claim adjustment expense and any changes in
assumption or methodologies for calculations for such liabilities. The guidance is effective for
periods beginning after December 15, 2016. We are evaluating the effect that the adoption of
ASU 2015-09 will have on our consolidated financial statements.
In May of 2015 the FASB issued ASU 2015-07 Fair Value Measurement (Topic 820) which eliminated the requirement for investments measured at fair value using net asset value as a practice
expedient to be categorized within the fair value hierarchy. We early adopted this guidance and
have retrospectively revised prior year fair value disclosures contained in these financial statements to conform to current period presentation. This guidance requires a change in disclosure
only and adoption did not have an impact on our financial condition or results of operations.
On January 1, 2014, the Company adopted the provisions of FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income. ASU 2013-02 requires an entity to provide information about
the amounts reclassified out of accumulated other comprehensive income by component.
In addition, an entity is required to present, either on the face of the statement where net
income is presented or in the notes, significant amounts reclassified out of accumulated
comprehensive income by the respective line items of net income but only if the amount
reclassified is required under GAAP to be reclassified to net income in its entirety in the
same reporting period. For other amounts that are not required under GAAP to be reclassified
in their entirety to net income, an entity is required to cross-reference to other disclosures
required under GAAP that provide additional detail about those amounts. ASU 2013-02 does
not change the requirements for reporting net income or other comprehensive income in
financial statements. The adoption of ASU No. 2013-02 did not have an effect on the Company’s consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-03, Derivatives and Hedging (Topic 815):
Accounting for Certain Receive Variable, Pay Fixed Interest Rate Swaps – Simplified Hedge
Accounting Approach (a consensus of the Private Company Council). ASU 2014-03 provides
private companies the option to apply the simplified hedge accounting approach for interest rate
swaps that are entered into for the purpose of economically converting variable rate interest
payments to fixed rate payments. The guidance will help reduce the cost and complexity associated with interest rate swaps and will reduce volatility in private companies’ income statements.
This alternative guidance is not permitted for public companies or not for profit organizations.
Early application is permitted, including application to any period for which the entity’s annual
financial statements have not yet been made available for issuance. The Company has implemented the provisions of ASU 2014-03 as of January 1, 2014. The adoption of ASU 2014-03 did
not have a material effect on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements –
Going Concern (Subtopic 205-40). ASU 2014-15 provides guidance to all entities on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to
continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods ending after December 15, 2016. ASU 2014-15 did not have
an effect on the Company’s consolidated financial statements.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606). ASU 2014-09 provides guidance to all entities in order to establish a common
revenue standard for companies entering into contracts with customers for the transfer of
goods or services or entering into contracts for the transfer of nonfinancial assets. The guidance in this update is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2017. The Company is in the
process of evaluating the impact of this guidance on contracts entered into with customers
and future revenue recognition.
Subsequent Events
In preparing these consolidated financial statements, management has evaluated events and
transactions for potential recognition or disclosure through February 29, 2016, the date the
consolidated financial statements were available to be issued.
Note 2: Investments
The cost or amortized cost and estimated fair values of investments at December 31 are as
follows:
2015
COST OR
AMORTIZED
COST
Fixed income securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
Obligations of states and
political subdivisions
Corporate securities
Mortgage-backed and assetbacked securities
5,471
$ 273
65,239
28,757
GROSS
UNREALIZED
LOSSES
$
ESTIMATED
FAIR VALUE
(18)
$ 5,726
4,546
1,090
(5)
(123)
69,780
29,724
35,189
1,161
(362)
35,988
134,656
7,070
(508)
141,218
Preferred stocks
Common stocks
2,277
151,354
210
72,878
(290)
(8,038)
2,197
216,194
Total
$288,287
$80,158
$(8,836)
$359,609
Total fixed income
securities
$
GROSS
UNREALIZED
GAINS
23
DE C EM BE R 3 1 , 201 5 A ND 2014
24
2014
COST OR
AMORTIZED
COST
and agencies
Total fixed income
securities
Preferred stocks
Common stocks
Total
$
GROSS
UNREALIZED
GAINS
9,930
$ 1,495
54,246
29,103
GROSS
UNREALIZED
LOSSES
$
ESTIMATED
FAIR VALUE
(23)
$ 11,402
3,563
1,733
(5)
(31)
57,804
30,805
45,233
1,888
(217)
46,904
138,512
8,679
(276)
146,915
2,277
149,749
203
89,217
(286)
(2,607)
2,194
236,359
$290,538
$98,099
$(3,169)
$385,468
Other investments in limited partnerships are classified as available for sale and carried at fair
value in our consolidated balance sheet as follows:
COST
Other Invested Assets
ESTIMATED FAIR VALUE
2015
2014
2015
2014
$32,150
$24,649
$28,604
$25,269
The amortized cost and estimated fair value of fixed income securities and convertible bonds
at December 31, 2015, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or repayment penalties.
AMORTIZED
COST
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed and asset-backed securities
Total
$
3,363
24,207
39,913
42,324
ESTIMATED FAIR
VALUE
$
3,402
25,048
41,867
45,370
109,807
35,189
115,687
35,988
$144,996
$151,675
DE C E M BER 3 1 , 2 0 1 5 AND 2014
Net realized gains on investments consisted of the following:
25
2014
2015
Realized gains on investments
Realized losses on investments
Change in fair value of convertible securities
Foreign currency transaction gains
Foreign currency transaction losses
Other-than-temporary impairment charges
$10,991
(4,665)
(1,286)
1,189
(63)
(2,500)
$29,748
(2,149)
(247)
25
(29)
(8)
$ 3,666
$ 27,340
The 2015 other-than-temporary impairment charge noted above related to an investment in an
oil and gas related limited partnership. This charge resulted from a reduction in the GAAP book
value of the limited partnership caused by impairment charges to partnership assets. There
were no other-than-temporary impairments for mortgage-backed and asset-backed securities
for 2015 and $8 for 2014.
The Company had on deposit, as required by various state regulatory agencies, fixed income
securities with a fair value of $3,129 and $3,232 and cash equivalents of $341 and $164 at
December 31, 2015 and 2014, respectively.
As of December 31, 2015 and 2014, the Company’s investment portfolio had gross unrealized
losses of $8,836 and $3,169, respectively. For securities that were in an unrealized loss position as of December 31, the lengths of time that such securities have been in an unrealized
loss position, as measured by their year-end fair values, are as follows:
LESS THAN 12 MONTHS
FAIR
VALUE
December 31, 2015:
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
$ 2,585
agencies
Obligations of
states and political
1,441
subdivisions
4,128
Mortgage-backed
and asset-backed
8,578
securities
Total fixed income
securities
Preferred stocks
Common stocks
Total
12 MONTHS OR MORE
UNREALIZED
LOSSES
$
(12)
FAIR
VALUE
$
694
UNREALIZED
LOSSES
$
TOTAL
FAIR
VALUE
(6)
$ 3,279
UNREALIZED
LOSSES
$
(18)
(5)
(123)
518
—
—
—
1,959
4,128
(5)
(123)
(129)
10,272
(233)
18,850
(362)
16,732
(269)
11,484
(239)
28,216
(508)
—
29,288
—
(6,221)
—
4,523
(290)
(1,817)
—
33,811
(290)
(8,038)
$46,020
$(6,490)
$16,007
$(2,346)
$ 62,027
$(8,836)
DE C EM BE R 3 1 , 201 5 A ND 2014
26
LESS THAN 12 MONTHS
FAIR
VALUE
December 31, 2014:
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
$ 894
agencies
Obligations of
states and political
272
subdivisions
249
Mortgage-backed
and asset-backed
1,547
securities
Total fixed income
securities
Preferred stocks
Common stocks
Total
UNREALIZED
LOSSES
$
12 MONTHS OR MORE
FAIR
VALUE
(3)
$ 1,437
—
(27)
UNREALIZED
LOSSES
$
TOTAL
FAIR
VALUE
UNREALIZED
LOSSES
(20)
$ 2,331
$
(23)
1,085
210
(5)
(4)
1,357
459
(5)
(31)
(11)
13,540
(206)
15,087
(217)
2,962
(41)
16,272
(235)
19,234
(276)
34
13,597
—
(1,921)
1,914
2,551
(286)
(686)
1,948
16,148
(286)
(2,607)
$16,593
$(1,962)
$20,737
$(1,207)
$ 37,330
$(3,169)
There were 81 and 82 fixed income securities in an unrealized loss position as of December
31, 2015 and 2014, respectively. In management’s opinion, the unrealized losses on fixed
income securities reflect general market conditions. Management believes that the unrealized
losses are temporary. The Company does not intend to sell these securities prior to maturity
or market recovery, and it is more likely than not the Company has the ability to hold these
securities until maturity or market recovery. Management performed cash flow testing on its
mortgage-backed and asset-backed securities and based on this cash flow testing all principal
of these securities was deemed to be recoverable at December 31, 2015. There were 85 and
66 common and preferred stocks in an unrealized loss position as of December 31, 2015 and
2014, respectively. Management believes that the unrealized losses on common and preferred
stocks reflect general market conditions and has the intent and ability to hold these common
and preferred stocks to market price recovery of original cost.
Note 3: Fair Value Measurements
The Company measures fair value by categorizing assets and liabilities based upon the level of
judgment associated with the inputs to measure their fair value. These levels are:
Level 1 -Inputs that are unadjusted, quoted prices for identical assets or liabilities in active
markets at the measurement date.
Level 2 -Inputs other than quoted process included in Level 1 that are observable for the
asset or liability through corroboration with market data at the measurement
date.
Level 3 -Unobservable inputs that reflect management’s best estimate of what market
participants would use in pricing the asset or liability at the measurement date.
The fair values for securities included in Level 1 are based on observable inputs either directly
or indirectly, such as quoted prices in markets that are active, quoted prices for similar
DE C E M BER 3 1 , 2 0 1 5 AND 2014
securities at the measurement date; quoted prices in markets that are not active; or other
inputs that are observable. The Company classifies its investment in U.S. Treasury securities
and common stocks as Level 1 assets.
The fair values for securities included in Level 2 are based upon fair values generated by
external pricing models that vary by asset class and incorporate available trade, bid and other
market information, as well as price quotes from other independent market participants which
reflect fair value of that particular security. The Company considers its investments in U.S.
government agency bonds, municipal bonds, corporate bonds, mortgage-backed and assetbacked securities, and one convertible bond as Level 2 assets.
In classifying the mortgage-backed and asset-backed securities owned as Level 2 securities,
the Company considers the inputs as follows:
a. Quoted prices for similar assets or liabilities in active markets.
b. Quoted prices for identical or similar assets or liabilities in markets that are not active,
that is, markets in which there are few transactions for the assets or liabilities, the
prices are not current, or price quotations vary substantially either over time or among
market makers (for example, some brokered markets) or in which little information is
released publicly (for example, a principal-to-principal market).
The Company’s determination of the fair value of its interest rate swap as Level 2 is calculated using a discounted cash flow analysis based on the terms of the swap contract and the
observable interest rate curve.
Securities included in Level 3 are securities where inputs are based solely on a broker price
or unobservable market data. The Company classifies its investments in certain convertible
bonds, convertible preferred stocks, and a closely held equity security as Level 3 assets.
The fair value of the other invested assets (limited partnership interests) is determined by the
investment company and is based upon fair value policies established by management of the
underlying fund. Fair value policies at the underlying fund generally require the fund to utilize
pricing/valuation information; however, in some instances current valuation information, for
illiquid securities or securities in markets that are not active, may not be available from any
third party source, or fund management may conclude that the valuations available from third
party sources are not reliable. In these instances fund management may perform modelbased analytical valuations that may be used to value these investments. The Company uses
net asset value (NAV) per share (or its equivalent), as a practical expedient to estimate the fair
value of its other invested assets, if NAV is calculated consistent with accounting principles
generally accepted in the United States of America and sale of the investment at an amount
different than NAV is not probable. The Company considered the nature, risk, and probability
for the sale of the investment (at amounts different from NAV). The Company’s considerations
included (but were not limited to):
• Unfunded commitments (for additional investment)
• Redemption eligibility and frequency
• Required redemption notice
Based upon these considerations, the Company concluded that NAV for the other invested
assets is calculated consistent with accounting principles generally accepted in the United
States of America.
Investments carried at NAV may be adjusted based upon management’s assumptions; therefore, any withdrawal, transfer, or sale of the limited partnership interest is subject to the general partner’s discretion. At December 31, 2015 and 2014, the fair value using net asset value
for the Company’s other invested assets were $28,604 and $25,269, respectively.
27
DE C EM BE R 3 1 , 201 5 A ND 2014
28
One investment in a limited partnership included in other invested assets comprising 68% of
other invested assets is subject to certain lock up provisions. This investment provides that
the Company may not withdraw a capital contribution for 12 months following the date of its
initial investment. Following this one year lock up period, the Company, in order to make a
withdraw, must provide 90 days’ prior notice as of the last date of each calendar quarter to the
general partner. Withdrawals made by the Company less than 36 months from initial contribution are subject to a 3% early withdrawal charge. These restrictions may be waived by the
general partner in the case of certain events or at the discretion of the general partner. This
partnership does not have a finite life.
One investment in a master limited partnership included in other invested assets comprising
26% of other invested assets contains a stipulation that redemptions by the Company within
12 months following its initial investment are subject to a 1% early withdrawal charge. This
restriction may be waived by the managing member. The Company can make a withdrawal as
of the last business day of the month by providing notice to the managing member at least 30
days in advance of the withdrawal. This partnership does not have a finite life.
One investment in a limited partnership included in other invested assets comprising 6% of
other invested assets has a term of 10 years from the initial closing, with an option for up to
two consecutive one year extensions at the general partner’s election. A 90% in interest of
the limited partners may elect to terminate the fund at any time. This limited partnership is not
subject to lock up provisions.
There were no unfunded commitments related to any of the Company’s limited partnership
investments as of December 31, 2015 or 2014.
The following table summarizes fair value measurements by level within the fair value hierarchy at
December 31, 2015 and 2014 for assets and liabilities measured at fair value on a recurring basis:
2015
FAIR VALUE MEASUREMENTS USING:
DESCRIPTION
Assets
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of states and political
subdivisions
Mortgage-backed and asset-backed
securities
TOTAL
$
5,726
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)
$
5,726
SIGNIFICANT OTHER
OBSERVABLE
INPUTS
(LEVEL 2)
$
—
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)
$
—
69,780
29,724
—
—
69,780
29,724
—
—
35,988
—
35,988
—
141,218
5,726
135,492
—
Convertible bonds
Preferred stocks
Common stocks
10,457
2,197
1,835
216,194
—
—
—
216,095
2,394
1,649
—
—
8,063
548
1,835
99
Total bonds and stocks
371,901
221,821
139,535
10,545
Total fixed income securities
Other invested assets measured at
net asset value (c)
Liabilities
28,604
—
—
—
$400,505
$221,821
$139,535
$10,545
$
$
$
$
184
—
184
—
DE C E M BER 3 1 , 2 0 1 5 AND 2014
29
2014
DESCRIPTION
TOTAL
Assets
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of states and political
subdivisions
Mortgage-backed and asset-backed
securities
$ 11,402
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)
$
SIGNIFICANT OTHER
OBSERVABLE
INPUTS
(LEVEL 2)
7,512
57,804
30,805
$
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)
3,890
—
—
$
57,804
30,805
—
—
—
46,904
—
46,904
—
146,915
7,512
139,403
—
Convertible bonds
Preferred stocks
Common stocks
10,785
2,194
1,665
236,359
—
—
—
236,264
3,076
1,636
—
—
7,709
558
1,665
95
Total bonds and stocks
397,918
243,776
144,115
10,027
Total fixed income securities
Other invested assets measured at
net asset value (c)
Liabilities
25,269
—
—
—
$423,187
$243,776
$ 144,115
$10,027
$
$
$
$
450
—
450
—
(c) In accordance with subtopic 820-10 certain investments that are measured at fair value
using the NAV per share (or its equivalent) practical expedient have not been classified in
the fair value hierarchy. The amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance
sheet.
For fair value measurements using Level 3 inputs, a reconciliation of the beginning and ending
balances is as follows at December 31:
2015
FIXED INCOME
SECURITIES
Purchases
Sales
Distributions
Transfers in from Level 2
Transfers out to Level 2
Total gains (losses):
Included in earnings (reported
in net realized gains on
investments)
Included in other
comprehensive loss
Balance,
December 31, 2015
CONVERTIBLE
BONDS
PREFERRED
STOCKS
CONVERTIBLE
PREFERRED
STOCKS
COMMON
STOCKS
TOTAL
$—
—
—
—
—
—
$7,709
3,981
(61)
—
606
(3,179)
$558
—
—
—
—
—
$1,665
938
(517)
—
—
—
$95
—
—
—
—
—
$ 10,027
4,919
(578)
—
606
(3,179)
—
(993)
—
(251)
—
(1,244)
—
4
(6)
$1,835
$99
—
$—
—
$ 8,063
(10)
$548
$ 10,545
DE C EM BE R 3 1 , 201 5 A ND 2014
30
2014
FIXED INCOME
SECURITIES
Purchases
Sales
Distributions
Transfers in from Level 2
Transfers out to Level 2
Total gains:
Included in earnings (reported
in net realized gains on
investments)
Included in other
comprehensive income
Balance,
December 31, 2014
CONVERTIBLE
BONDS
$306
—
(292)
—
—
—
$10,248
2,405
(4,192)
—
46
(889)
PREFERRED
STOCKS
$549
—
—
—
—
—
CONVERTIBLE
PREFERRED
STOCKS
COMMON
STOCKS
$1,564
99
(113)
—
—
—
$83
—
—
—
—
—
TOTAL
$12,750
2,504
(4,597)
—
46
(889)
(14)
91
—
115
—
192
—
—
9
—
12
21
$ —
$ 7,709
$558
$1,665
$95
$ 10,027
The Company’s policy is to transfer assets and liabilities into and out of Level 3 at the beginning of the reporting period when the circumstance is such that significant inputs can or cannot be corroborated with market observable data.
The following table presents the carrying amounts and estimated fair values of the Company’s
financial instruments at December 31, 2015 and 2014. The fair value of a financial instrument
is the amount that would be paid to transfer an asset or a liability in an orderly transaction
between market participants at the measurement date.
2014
2015
Financial assets:
Insurance Group
Investments:
Fixed income securities
Convertible bonds
Preferred stocks
Convertible preferred
stocks
Common stocks
Other invested assets
Other receivables
Accrued income from
investments
Security Group:
Trade accounts receivable
Prepaid expenses and other
current assets
CARRYING
VALUE
FAIR VALUE
CARRYING
VALUE
$141,218
10,457
2,197
$141,218
10,457
2,197
$146,915
10,785
2,194
$146,915
10,785
2,194
1,835
216,194
28,604
14,672
1,030
1,835
216,194
28,604
14,672
1,030
1,665
236,359
25,269
13,204
763
1,665
236,359
25,269
13,204
763
1,523
1,523
1,591
1,591
2,360
23,137
2,360
23,137
701
25,704
701
25,704
6,361
6,361
5,817
5,817
FAIR VALUE
DE C E M BER 3 1 , 2 0 1 5 AND 2014
2014
2015
CARRYING
VALUE
Financial liabilities:
Security Group:
Accounts payable and
accrued expenses
Customer deposits
Long-term debt and current
maturities thereof
FAIR VALUE
CARRYING
VALUE
31
FAIR VALUE
24,234
887
184
24,234
887
184
23,816
1,134
450
23,816
1,134
450
$163,284
$163,284
$154,224
$154,224
The carrying amounts shown in the table are included in the consolidated balance sheet under
the indicated captions.
Cash and cash equivalents, other receivables, trade accounts receivable, accrued income from
investments, accounts payable, and accrued expenses - the carrying amounts at face value
approximate fair value because of the short maturity of these instruments.
Interest rate swap payable - Vector’s determination of the fair value of its interest rate swap is
calculated using a discounted cash flow analysis based on the terms of the swap contract and
the observable interest rate curve (Level 2 inputs).
The fair values of the financial instruments shown in the above table as of December 31, 2015
and 2014 represent management’s best estimates of the amounts that would be received
to sell those assets or that would be paid to transfer those liabilities in an orderly transaction
between market participants at that date. Those fair value measurements maximize the use
of observable inputs. However, in situations where there is little, if any, market activity for the
asset or liability at the measurement date, the fair value measurement reflects the Company’s
own judgments about the assumptions that market participants would use in pricing the asset
or liability. Those judgments are developed by the Company based on the best information
available in the circumstances.
The fair value of long-term debt is estimated by discounting the future cash flows of each
issuance at rates that the Company could obtain similar debt instruments of comparable
maturities.
The Security Group has assets and liabilities that are required to be recorded at fair value on a
nonrecurring basis when certain circumstances occur. In the case of intangible assets, upon
the occurrence of an event or change in circumstance that may indicate that the fair value of a
customer service agreement is less than its carrying value, the Company determines the fair
value of the specific customer service agreement and records an impairment for the amount
by which the carrying value exceeds the customer service agreement’s fair value. The estimate of fair value of a customer service agreement is determined using Level 3 inputs, primarily an analysis of future expected cash flows. The Company recorded impairment expense,
through amortization expense, on their customer service agreements of $6,891 and $2,499
during 2015 and 2014, respectively.
DE C EM BE R 3 1 , 201 5 A ND 2014
32
Note 4: Liability for Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as
follows:
2015
2014
Balance as of January 1
Less reinsurance recoverable
$93,536
(17,836)
$101,366
(27,304)
Net balance at January 1
75,700
74,062
Incurred related to:
Current year
Prior years
94,438
(903)
104,893
(3,808)
93,535
101,085
Paid related to:
Current year
Prior years
60,949
27,243
70,742
28,705
Total paid
88,192
99,447
Net balance as of December 31
81,043
75,700
Plus reinsurance recoverable
13,318
17,836
$ 94,361
$ 93,536
Total incurred
Balance at December 31
Due to changes in estimates of insured events in prior years, the Insurance Group decreased
the liability for unpaid losses and loss adjustment expenses relative to prior accident years in
2015 and 2014 by $903 and $3,808, respectively. The decrease in 2015 is due to better than
expected development of losses incurred, primarily in the homeowners and special property
lines of business, and primarily related to accident years 2012 through 2014. Additionally, the
decrease in 2015 was partially offset by adverse development in accident years 2005 and
prior relating to exposure to underground storage tanks in the homeowners and other liability
lines of business. The decrease in 2014 is due to better than expected development of losses
incurred, primarily in the homeowners and other liability lines of business, and primarily
related to accident years 2012 and 2013.
Note 5: Reinsurance
The Insurance Group purchases quota share and per risk and catastrophic excess of loss
reinsurance. The Insurance Group remains contingently liable in the event that the reinsurer is
unable to meet its obligations assumed under the reinsurance agreements.
The Insurance Group had no assumed premiums earned in 2015 and $57 for 2014 and ceded
premiums earned in 2015 and 2014 of $14,016 and $14,847, respectively. Losses and loss
adjustment expenses are net of reinsurance recoveries of $3,456 and $(2,254) in 2015 and
2014, respectively. Amounts paid to reinsurers related to the unexpired portion of reinsured
contracts were $1,913 and $1,957 as of December 31, 2015 and 2014, respectively.
The Insurance Group had no significant concentration in risk from any one unaffiliated reinsurer as of December 31, 2015 and 2014.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
Note 6: Dividends from Subsidiaries and Statutory Financial
Information
33
The Contributionship and its subsidiaries prepare statutory financial statements in accordance
with accounting practices prescribed or permitted by the Pennsylvania Insurance Department.
The Commonwealth of Pennsylvania requires that insurance companies domiciled in the
Commonwealth of Pennsylvania prepare their statutory financial statements in accordance
with the National Association of Insurance Commissioners Accounting Practices and Procedures manual, subject to any deviations prescribed or permitted by the Commonwealth of
Pennsylvania Insurance Commissioner. Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such practices differ from state to state, may
differ from company to company within a state, and may change in the future.
The Contributionship and its subsidiaries are restricted by law as to the amount of dividends
they may pay without the approval of regulatory authorities. During 2015, the maximum
amount of dividends that can be paid by the Contributionship without such approval is
$23,313. The Contributionship paid no ordinary dividends during 2015 and 2014.
The surplus of the Contributionship and its subsidiaries, as determined in accordance with
statutory accounting practices, is $233,126 and $244,967 at December 31, 2015 and 2014,
respectively. The net income of the Contributionship and its subsidiaries, as determined in
accordance with statutory accounting practices, is $3,826 and $16,035 for the years ended
Risk-based capital is designed to measure the acceptable amount of capital an insurer should have
based on the inherent risks of the insurer’s business. Insurers failing to meet adequate capital
levels may be subject to insurance department scrutiny and ultimately rehabilitation or liquidation. As of December 31, 2015 and 2014, the Contributionship and its subsidiaries maintained
statutory-basis surplus in excess of the minimum prescribed risk-based capital requirements. As
of December 31, 2015 and 2014, the Contributionship and its subsidiaries were in compliance with
the minimum capital requirements under Commonwealth of Pennsylvania regulations.
Note 7: Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31 are as follows:
2014
2015
Balance as of January 1
Goodwill acquired during the year
Amortization
$39,722
—
(4,642)
$44,364
—
(4,642)
Balance as of December 31
$35,080
$39,722
The following summarizes the gross carrying amount and accumulated amortization of
intangible assets as of December 31:
2014
2015
GROSS
CARRYING
AMOUNT
Customer service agreements
Customer relationships
Covenants not to compete
Covenants not to solicit
Technology
Trade Names
Total
ACCUMULATED
AMORTIZATION
GROSS
CARRYING
AMOUNT
ACCUMULATED
AMORTIZATION
$284,175
10,460
793
2,084
2,740
669
$ 137,021
1,911
430
619
1,301
318
$276,402
10,460
812
2,084
2,740
669
$ 124,010
1,106
330
358
754
184
$300,921
$141,600
$293,167
$126,742
DE C EM BE R 3 1 , 201 5 A ND 2014
34
Amortization expense, excluding impairment charges, for other intangible assets was $28,886
and $28,318 for the years ended December 31, 2015 and 2014, respectively.`
The estimated amortization expense for goodwill and other intangible assets for each of the
five succeeding fiscal years is as follows:
2016
2017
2018
2019
2020
$34,341
33,429
31,217
28,066
24,560
Note 8: Acquisitions
Industry Retail Group
On August 15, 2013, Vector, through its VIS subsidiary, acquired selected assets and assumed
certain liabilities of IRG. IRG provides virtual managed network services. As a result of the
acquisition, Vector began cross-selling virtual managed network services to existing customers. Goodwill arising from the acquisition consisted largely of Vector’s specific synergies
related to cross-selling. The results of the IRG acquisition have been included in the consolidated financial statements since the acquisition date. The acquisition was accounted for as a
business combination.
The following table summarizes the consideration paid for the IRG acquisition and the
amounts of estimated fair value of the assets acquired and liabilities assumed at the acquisition date.
Consideration:
Cash
Contingent consideration
Redeemable noncontrolling interest
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed:
Current assets
Intangible assets
Current liabilities
Total identifiable net assets assumed
Goodwill
Total
$ 27,737
3,227
25,710
$56,674
$ 853
16,561
(2,116)
15,298
41,376
$56,674
Of the acquired intangible assets, $10,460 was assigned to customer relationships, which are
amortized over 13 years, $2,740 was assigned to technology, which is amortized over 5 years,
$2,084 was assigned to covenants not to solicit, which are amortized over 8 years, $669 was
assigned to trade names, which are amortized over 5 years, and $608 was assigned to covenants not to compete, which are amortized over 5 years.
Funding for the acquisition consisted primarily of $27,737 in borrowings on Vector’s existing
revolving credit facility, contingent consideration with a fair value at the acquisition date of
$3,227, and issuance of 30% of the outstanding membership units of VIS to IRG (redeemable
noncontrolling interest) with a fair value at the acquisition date of $25,710. In August 2014,
the contingent consideration was adjusted to $3,558 based upon average monthly recurring
charges billed to customers during the 12 months subsequent to the acquisition date. The payment of the contingent consideration is being made in 24 monthly installments of $148, which
began in September 2014.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
In November 2014, IRG’s membership units in VIS were decreased by 27,052 units based
upon average monthly recurring charges billed to and collected from customers during the 12
months subsequent to the acquisition date, which resulted in an adjustment of $2,285 to the
redeemable noncontrolling interest with an offset to the unassigned equity.
Included within Vector’s membership units in VIS is a call option to purchase IRG’s membership units based on a multiple of trailing twelve-month gross margin at the exercise date.
Included within IRG’s membership units in VIS is a put option to sell IRG’s membership units
based on a multiple of trailing twelve-month gross margin at the exercise date. The noncontrolling interest becomes redeemable within 10 days after the earliest of (i) the third anniversary of the date of the acquisition and every anniversary thereafter or (ii) the date on which
certain principals of IRG no longer control IRG. Vector determined that the put/call option is
embedded within the redeemable noncontrolling interest shares that are subject to the put/
call option. Therefore, the put option is accounted for within redeemable noncontrolling interest in the consolidated balance sheet.
In accordance with ASC Topic 815, Vector initially measured the redeemable noncontrolling
interest at fair value. The acquisition date fair value of IRG’s redeemable noncontrolling interest in VIS was estimated by applying an income approach. This fair value measurement is
based on significant inputs that are not observable in the market and thus represents a Level
3 measurement. Key assumptions included a discount rate of 22.3% and the projected 12
month trailing gross margin on the third anniversary of the acquisition date.
Subsequent measurement of the redeemable noncontrolling interest is the greater of the
amount determined under ASC Subtopic 810-10 (adjusted carrying value) or ASC Section 480
10-S99 (redemption value). The noncontrolling interest was $22,244 at December 31, 2015 as
the adjusted carrying value exceeded the redemption value. During 2015, the carrying value
of the redeemable noncontrolling interest was adjusted for the net loss of $235 as well as tax
distributions of $440 related to IRG. During 2014, the carrying value of the redeemable noncontrolling interest was adjusted for the net loss of $911 as well as contributions of $450, tax
distributions of $45 related to IRG, and the unit adjustment of $2,285 discussed above.
Pelican Security Network, Inc. and Pelican Security Services, LLC
On August 31, 2015, Vector acquired selected assets and assumed certain liabilities of Pelican
Security Network, Inc. and Pelican Security Services, LLC (Pelican) located in Louisiana, Texas,
and Florida for a purchase price of $14,800. The results of Pelican have been included in the
consolidated financial statements since the acquisition date. The assets acquired represent
approximately 17,000 customer accounts in Louisiana, Texas, and Florida. The acquisition was
accounted for as a business combination.
The aggregate purchase price was $14,800 which included $15,300 of intangible assets and
$568 of tangible and current assets and $188 of noncurrent assets, net of $1,256 in current
liabilities. Of the $15,300 of intangible assets, $15,275 was assigned to customer service
agreements, which are amortized over 13 years, and $25 was assigned to covenants not to
compete, which are amortized over 5 years.
revolving credit facility and $1,606 in the form of a purchase holdback. The payment of the purchase holdback is contingent upon attrition of accounts over the first year with the payment
to be made in the third quarter of 2016. During 2015, the Vector incurred $310 in transaction
related expenses associated with the acquisition of Pelican, which is included in the accompanying statements of operations and comprehensive (loss) income.
Certified Security Systems, LLC
On November 30, 2009, Vector acquired selected assets of Certified Security Systems, LLC
(Certified) located in Jacksonville, Florida for a purchase price of $16,023. Certified provides
residential and commercial security services. The results of Certified have been included
in the consolidated financial statements since the acquisition date. The assets acquired
35
DE C EM BE R 3 1 , 201 5 A ND 2014
36
represent approximately 17,000 customer accounts primarily in Jacksonville, Ft. Lauderdale,
and Tallahassee, Florida. The acquisition was accounted for as a business combination.
The aggregate purchase price was $16,023, which included $17,297 of intangible assets and
$382 of tangible and current assets, net of $1,656 in current liabilities. Of the $17,297 of intangible assets, $17,247 was assigned to customer service agreements, which are amortized over
13 years, and $50 was assigned to covenants not to compete, which are amortized over 5 years.
revolving credit facility and $600 in the form of a purchase holdback. The payment of the purchase holdback was contingent upon attrition of accounts over the first year with the payment
to be made in the first quarter of 2012. In the year of acquisition, Vector expensed the deal
costs associated with this acquisition of $559. Additionally, for four years following the closing
of the transaction additional qualified monitoring contracts generated directly by the sellers
will be purchased by Vector for a specified multiple of monthly recurring income. The sellers
are under no obligation to generate any additional monitoring contracts under this provision.
Vector will record any such future payments as additional customer service agreement intangible assets when such assets are acquired. On February 1, 2010, Vector acquired additional
customer accounts (Supplemental Close) for an additional purchase price of $1,309.
In 2011, Vector recorded a purchase price reduction of $1,984 due to customer account attrition within the first year as provided in the asset purchase agreement. The adjustment was
recorded as a reduction to intangible assets (customer service agreements) with a $600
reduction to purchase holdbacks and a $107 reimbursement for unearned revenue. Vector
acquired additional customer accounts for an additional purchase price of $786 with the payment applied against the purchase price reduction. Vector received a signed amendment to
the asset purchase agreement that requires the sellers to repay the remaining $491 in three
equal annual installments.
In 2012, Vector acquired additional customer accounts for a purchase price of $1,472 of which
$1,144 was paid to the sellers and $328 was applied to the amount due from the sellers.
In 2013, Vector acquired additional customer accounts for a purchase price of $145 with $163
remaining due to Vector related to the 2011 purchase price reduction.
In 2014, Vector acquired additional customer accounts for a purchase price of $2,380 of which
$2,217 was paid to the sellers and $163 was applied to the amount due from sellers.
Others
Vector acquired selected accounts from various authorized dealers located in various states.
The total purchase price for these accounts was $13,335 and $20,515 in 2015 and 2014,
respectively. The revenue and associated costs from the monitoring contracts acquired in
these transactions have been included in the consolidated financial statements since the
acquisition dates. The assets acquired represent approximately 9,800 accounts in 2015 and
14,000 accounts in 2014, and are primarily in Massachusetts, Pennsylvania, Maryland, Virginia,
North Carolina, and South Carolina. The entire aggregate purchase price was assigned to
customer service agreements, which are amortized over 10 years. Substantially all accounts
are subject to a one-year holdback period in an amount equal to approximately 10% of the
purchase price.
Patrol
On June 1, 2014, Vector sold certain assets and property of its wholly owned subsidiary Patrol
to United American Security, LLC. Pursuant to the asset purchase agreement, Vector sold the
interests of accounts receivable with a net book value of $716 and certain property and equipment with a net book value of $60 as of the closing date for a total purchase price of $3,867.
The following table summarizes the consideration received for assets of Patrol and their
amounts of estimated fair value.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
37
Consideration:
Cash
Purchase holdback
$3,357
510
$3,867
Fair value of total consideration transferred
The purchase holdback payment of $510 was received in September 2014. Vector incurred
$203 in transaction related expenses which is recorded within gain on business divestitures in
the consolidated statements of operations. As a result of the sale of certain assets and property, Vector recorded a gain of $2,888 which is recorded within gain on business divestitures
in the accompanying consolidated statements of operations.
Note 9: Borrowings and Credit Arrangements
Long-term debt as of December 31 consists of the following:
Revolving credit facility - variable interest rate (2% as of
December 31, 2015 and 2014)
Capital leases - bearing interest at rates ranging from 3%
to 7% as of December 31, 2015 and 2014
Less current maturities
Total long-term debt
2015
2014
$160,114
$151,013
3,170
3,211
163,284
(5,367)
$157,917
154,224
(3,332)
$150,892
During 2013, Vector refinanced its existing debt by obtaining a $250,000 revolving credit facility that permits Vector to borrow, on a revolving basis, through July 31, 2018. Interest on the
entire $250,000 credit facility is computed at LIBOR plus a scaling interest rate premium
based upon a total debt to cash flow ratio. Borrowings under this loan agreement are collateralized by Vector’s assets, including the customer service agreements.
On August 1, 2012, Vector entered into a 47 month interest rate swap agreement with a
notional amount of $90,000. This derivative was designated as a cash flow hedge and is recognized on the consolidated balance sheet at its fair value. Changes in fair value are recorded
in other comprehensive income, net of taxes. Under the terms of the swap agreement, Vector receives variable-rate interest payments based on 30 day LIBOR and makes fixed-rate
payments of 0.835%. The fair value of the swap as of December 31, 2015 and 2014 was
approximately $184 and $450, respectively, and was recorded as a liability in the consolidated
financial statements. For the year ended December 31, 2015, $593 was reclassified from
accumulated other comprehensive income into interest expense.
Vector must pay a quarterly commitment fee of approximately 0.3% on the available unused
portion of the credit facility. As of December 31, 2015, the available unused portion of the
credit facility was $87,262.
Under Vector’s revolving credit facility, approximately $2,624 were committed for outstanding letters of credit as of December 31, 2015 and 2014, respectively. There were no amounts
drawn on the letters of credit as of December 31, 2015 and 2014.
The credit agreement contains covenants with respect to, among other things, the maintenance of specified financial ratios. These provisions, if violated, could terminate the agreement
and cause an acceleration of the maturity date. As of December 31, 2015 and 2014, the Company was in compliance with all such covenants.
DE C EM BE R 3 1 , 201 5 A ND 2014
38
The aggregate maturities of debt principal for Vector as of December 31, 2015 are as follows:
$
2016
2017
2018
2019
2020
5,367
1,054
156,863
—
—
Total
$163,284
The estimated fair value of Vector’s long-term debt approximated the carrying value as of
December 31, 2015.
Note 10:Leases
Vector has various capital leases for equipment (Note 9) that expire at various dates during the
next 40 months. Amortization of assets held under capital leases is included with depreciation
expense.
Vector leases certain equipment and office space under various operating leases. The future
minimum rental commitments for all such noncancelable leases as of December 31, 2015
are as follows:
2016
$ 3,817
2017
3,485
2018
2,745
2019
2,112
2020
1,478
Thereafter
3,837
Total
$17,474
Rent expense for leased equipment and office space totaled $5,325 and $5,024 for the years
ended December 31, 2015 and 2014, respectively.
Note 11:Income Taxes
Income tax (benefit) expense for the years ended December 31 consists of:
2014
2015
CURRENT
DEFERRED
TOTAL
CURRENT
DEFERRED
TOTAL
$4,037
$(6,348)
$(2,311)
$11,371
$(2,816)
$8,555
The expected income tax (benefit) expense for the years ended December 31 differed from
the amounts computed by applying the U.S. federal income tax rate of 35% as follows:
2015
Computed “expected” income tax expense
Increase (decrease) in income taxes resulting from:
Tax-exempt interest
Dividends received deduction
State taxes, net of federal benefit
Provision to return adjustments
Other, net
$(1,888)
(671)
(894)
300
27
815
$(2,311)
2014
$9,162
(616)
(962)
259
295
417
$8,555
DE C E M BER 3 1 , 2 0 1 5 AND 2014
The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities as of December 31 are as follows:
2015
2014
$ 5,033
1,751
2,141
1,083
755
186
$ 5,145
1,585
1,376
1,006
659
207
10,949
9,978
(4,790)
(23,720)
(23)
(1,732)
(4,805)
(33,441)
(473)
(1,731)
Total deferred income tax liability
(30,265)
(40,450)
Net deferred income tax liability
$(19,316)
$(30,472)
Security Group:
Deferred income tax asset components:
Accrued expenses
Deferred rent
Inventories and accounts receivable
Interest rate swap
Intangible assets
Investments in VIS LLC
$ 3,185
111
1,442
64
26,221
1,426
$ 2,732
100
1,228
157
20,930
1,544
32,449
26,691
(4,949)
(4,283)
(3,968)
(4,404)
(9,232)
(8,372)
Insurance Group:
Deferred income tax asset components:
Unearned premiums and advance premiums
Unpaid losses and loss adjustment expenses
Other-than-temporary impairments
Accrued pension liability
Deferred compensation
Other
Total deferred income tax asset
Deferred income tax liability components:
Unrealized investment gains
Unrealized investment gains on convertible securities
Other
Total deferred tax asset
Deferred income tax liability components:
Unbilled revenue
Property and equipment
Total deferred income tax liability
Net deferred income tax asset
$ 23,217
$ 18,319
In assessing the realizability of deferred income tax assets, management considers whether
it is more likely than not that some portion or all of the deferred income tax assets will not
be realized. Management considers the scheduled reversal of deferred income tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. The
ultimate realization of deferred income tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. The amount of the deferred income tax asset considered realizable; however, could
be reduced in the near term if estimates of future taxable income or statutory tax rates are
39
DE C EM BE R 3 1 , 201 5 A ND 2014
40
reduced during the carryforward period. Management has determined that it was not required
to establish a valuation allowance against the net deferred income tax asset.
Vector has no remaining state net operating loss carryforwards, as they have been utilized in
offsetting state taxable income as of December 31, 2015.
The Company has no unrecognized tax benefits as of December 31, 2015.
There are no tax-related interest or penalties accrued on the consolidated balance sheet at
December 31, 2015 and 2014, nor has any tax related interest or penalties been recognized in
the consolidated statement of operations for the years ended December 31, 2015 and 2014.
The Company’s federal income tax returns for tax years ended December 31, 2010 and prior
are closed to examination.
Note 12:Employee Benefit Plans
Defined Benefit Pension Plan
The Insurance Group has a defined benefit pension plan (Plan) covering all employees meeting
eligibility requirements. It is the Insurance Group’s policy to fund pension costs in accordance
with the funding requirements of the Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code. The Insurance Group expects to pay contributions to the Plan during 2016 of $300. The Insurance Group made $300 and $271 contributions to the Plan in 2015
and 2014, respectively.
The components of the net periodic benefit cost are as follows:
2015
Interest cost
Expected return on plan assets
Amortization of net gain
Total net periodic benefit cost
2014
$ 312
(504)
82
$ 321
(458)
48
$(110)
$(89)
On December 13, 2006, the Board of Directors of the Company voted to freeze the benefits
of the participants in the Plan effective April 1, 2007.
The Insurance Group recognizes the overfunded or underfunded status of its defined benefit
pension plan as an asset (other assets) or liability (other liabilities) in the consolidated balance sheet. Changes in the funded status during any given period of time are recognized as a
change in other comprehensive income.
DE C E M BER 3 1 , 2 0 1 5 AND 2014
The table set forth below reconciles the defined benefit pension plan’s funded status reconciled with the amount in the consolidated balance sheet as of December 31:
2015
2014
$ 8,730
312
(481)
(417)
$ 7,675
321
(466)
1,200
Benefit obligation as of December 31
8,144
8,730
Plan assets as of January 1
Employer contributions
Actual return on assets
Distributions
7,258
300
(216)
(480)
6,679
271
774
(466)
Plan assets as of December 31
6,862
7,258
Benefit obligation as of January 1
Interest cost
Distributions
Change due to change in assumptions and experience
$(1,282)
Funded status
$(1,472)
The net actuarial loss recognized in accumulated other comprehensive income, pre-tax in the
consolidated balance sheet as of December 31 is as follows:
2015
2014
$ 3,096
$ 2,875
Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows at December 31:
Weighted-average discount rate
Expected long-term rate of return on assets
Rate of increase in compensation levels
2015
2014
3.97%
7.00
N/A
3.66%
7.00
N/A
The expected long-term rate of return on assets reflects the average rate of earnings
expected on the funds invested or to be invested to provide for the benefits included in the
projected benefit obligation. The selected rate considers the historical and expected future
investment trends of the present and expected assets in the Plan.
There were $480 and $466 of benefit payments made under the Plan in 2015 and 2014, respectively. Expected payments under the Plan in future years are as follows at December 31, 2015:
2016
2017
2018
2019
2020
2021 - 2025
$ 506
498
492
487
496
$2,534
41
DE C EM BE R 3 1 , 201 5 A ND 2014
42
The Plan had approximately 70% of its investments invested in common stocks, 20%
invested in corporate bonds and the remainder invested in U.S. Government and mortgagebacked securities and cash and cash equivalents for both year ending 2015 and 2014.
The following table provides the fair value measurements of the Plan assets by level within the
fair value hierarchy at December 31. These assets are measured at fair value on a recurring basis.
2015
DESCRIPTION
and agencies
Total fixed income
securities
Common stocks
TOTAL
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)
$ 371
$ 318
209
1,386
SIGNIFICANT
OTHER OBSERVABLE INPUTS
(LEVEL 2)
$
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)
53
$—
—
—
209
1,386
—
—
1,966
318
1,648
—
4,772
4,772
—
—
$6,738
$5,090
$1,648
$—
2014
DESCRIPTION
and agencies
Total fixed income
securities
Common stocks
TOTAL
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)
$ 225
$ 170
109
1,485
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)
$
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)
55
$—
—
—
109
1,485
—
—
63
—
63
—
1,882
170
1,712
—
5,098
5,098
—
—
$6,980
$5,268
$1,712
$—
DE C E M BER 3 1 , 2 0 1 5 AND 2014
See Note 3 for additional information regarding the Company’s categorization of fair value of
financial instruments.
The remainder of Plan assets not included above are comprised of cash and cash equivalents.
The objective of the portfolio is to maximize the total rate of return while controlling investment risk and to ensure sufficient funding status of the Plan as actuarially determined by the
total return objective.
The Plan’s investment guidelines are as follows:
• No more than 5% of fixed income securities rated below “A” by either Standard and Poor’s
or Moody’s may be purchased. None may be rated below “Baa.”
• Average duration of bonds will range from 4 to 7 years, depending on the market outlook.
• Prohibitions
a) Unincorporated businesses
b) Private placements or direct mortgages without approval
c) Financial guarantees
Other Benefit Plans
The Company maintains other benefit plans, including defined contribution plans (401(k)), with
a cash or deferred arrangement covering all employees meeting eligibility requirements. Participants may elect to contribute, on a pretax basis, up to the Internal Revenue Service limit.
The Company’s matching contributions were $2,336 in 2015 and $2,177 in 2014.
The Company has a voluntary deferred compensation plan for certain employees meeting
Plan eligibility requirements (the Participants) under which salaries and annual incentive
awards can be deferred. The Participants deferred receipt of $266 and $301 in 2015 and
2014, respectively. The Participants have the option of being paid at termination of employment or on the fifth March 1st immediately following the date on which the annual compensation or base salary would have been payable. The Company made payments of $99
in 2015 and $76 in 2014. Amounts accrued under the plan were $2,778 and $2,742 as of
The Company provides certain postretirement health care benefits. The following table sets
forth the plan’s funded status reconciled with the amount shown in the consolidated balance
sheet in other liabilities as of December 31, 2015 and 2014:
Benefit obligation for retirees and fully vested active plan
participants
Plan assets at fair value
Accrued postretirement benefit cost
2015
2014
$ 203
—
$ 277
—
$ (203)
$ (277)
Net periodic postretirement benefit cost for 2015 and 2014 was $26 and $23, respectively.
For measurement purposes, health care cost trend increases do not affect the Company’s
costs due to the fact that the Company has limited the maximum dollar amount of benefits
that will be paid. The weighted average discount rate used was 3.97% and 3.66% in 2015 and
2014, respectively.
43
Independent Auditors’ Report
44
Board of Directors
The Philadelphia Contributionship Mutual Holding Company
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of The Philadelphia
Contributionship Mutual Holding Company and its subsidiaries (the Company), which comprise the
consolidated balance sheet as of December 31, 2015 and 2014, and the related consolidated statements of
operations, comprehensive income (loss), equity, and cash flows for the years then ended, and the related
notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We did not audit the consolidated financial statements of Vector Security Holdings, Inc., a wholly-owned
subsidiary, whose statements reflect total assets constituting 39% and 38%, respectively, of consolidated
total assets at December 31, 2015 and 2014, and total revenues constituting 69% and 64%, respectively,
of consolidated total revenues for the years then ended. Those financial statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as it related to the amounts
included for Vector Security Holdings, Inc. for the years ended December 31, 2015 and 2014, is based
solely on the report of other such auditors. We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, based on our audit and the report of the other auditors, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of The
Philadelphia Contributionship Mutual Holding Company and its subsidiaries as of December 31, 2015 and
2014, and the results of their operations and their cash flows for the years then ended in accordance with
accounting principles generally accepted in the United States of America.
Philadelphia, Pennsylvania
February 29, 2016
Directors & Officers
D i r e ct o r s
HONORARY DIRECTORS
Scott M. Jenkins, Chairman of the Board
President, S. M. Jenkins & Co.
General Partner, Jenkins Partners, L.P.
H. Gates Lloyd
Mary Patterson McPherson, Ph.D.
Thomas B. Morris, Jr., Esquire
Kaighn Smith, M.D.
Bernard C. Watson, Ph.D.
Minturn T. Wright, III, Esquire
Bruce M. Eckert
Founder, Eastern Insurance Holdings, Inc.
Ira H. Fuchs
President, BITNET, LLC
Phoebe A. Haddon
Chancellor, Rutgers University - Camden
Harry E. Hill, III
President & CEO,
Empire Abrasive Equipment Company
President & CEO, Delaware Car Company
Craig N. Johnson
Consultant
Ernest E. Jones, Esquire
President, EJones Consulting, LLC
Andrew L. Lewis, IV
Consultant
Ronald J. Naples
Chairman Emeritus, Quaker Chemical
Corporation
Alfred W. Putnam, Jr.
Chairman Emeritus,
Drinker Biddle and Reath LLP
Christina T. Webber
Former President & CEO,
Consultant
Design: Malish & Pagonis
Marna C. Whittington, Ph.D.
Retired Investment Executive
OFFICERS
Scott M. Jenkins,
Chairman
Robert G. Whitlock, Jr.,
President & CEO
Kevin L. Tate,
Vice President, CFO and Treasurer
Stephen A. McGowan,
Assistant Vice President, Controller and
Assistant Treasurer
Stacey M. Manzo,
Secretary
ANNUAL MEETING
The 264th Annual meeting of the Members of
the Company will be held on Monday, April 25,
2016, at 11:00 a.m. at the Company’s office.
T h e Philade lphia Contr ibu tion sh i p
212 south fourth street
philadelphia, pa 19106-9232
215.627.1752 888.627.1752
www.contributionship.com

2015 Annual Report - The Philadelphia Contributionship

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